Markets regulator Sebi on Wednesday ordered freezing of bank accounts of two firms of the Sahara Group and its top executives following a Supreme Court directive. What happens when bank accounts are frozen? ET explains the meaning of such an action and its impact.

What is freezing of bank accounts?

Freezing of bank account means there will be no transaction in that account until further notice. No money can be debited from the account from the specified date. All payments will be stopped even in case of cheques issued earlier by the account holder. However, any deposit already in the pipeline can be credited.

Banks do not have the power to freeze bank accounts per se. But a bank can act proactively if it finds unusual or suspect transactions in any account. In such cases, the bank has to send a notice to the customer first before freezing the account. However, banks can freeze a savings account if it has been used for commercial purposes as business activity in these accounts is prohibited under RBI rules.

Can an account be frozen if it is not KYC-compliant?

Bank may freeze an account or stop other banking facilities if the customer does not furnish know-your-customer (KYC) documents. But in April last year, the Gujarat High Court ruled that even if a customer does not comply with KYC guidelines a bank can neither freeze the account nor can it stop issuing cheque books or providing ATM facility.

Idle or inoperative bank accounts are those where no deposit or withdrawal is made in two years except for interest payments credited. Banks don't have the rights to freeze these accounts. Moreover, such accounts can be reactivated without paying any charges. However, banks do verify the person's credentials afresh before reactivating the accounts.